Blockchain and microlending

21 August, 2018

The industry of microlending was designed originally to help reduce poverty by providing those in need with small loans that could help them get on their own feet.

The idea is that microlending makes it possible for those who could not historically get loans to be approved for a smaller loan. Despite its promises, many critics have concerns that the only people who benefit from the current system of microlending are the lenders. Those banks and individuals who make microloans tend to have exorbitant rates and interest payments.1

There is agreement that although the current system of microlending is not perfect, it does serve a useful purpose. Many feel that the blockchain can be the solution to overcoming the current obstacles and critiques.

Micro-lending is HUGE

To understand the potential for startups that aim to bring blockchain technology to the world of microlending, take a second to absorb the importance and scale of the microlending industry. Many commercial banks, including Deutsche Bank AG and Citigroup Inc., have already created microfinance funds. Reports say that billions are invested in this industry, including those from well-developed countries making small loans to those in poorer areas. The United Nations strongly approves of microlending and its potential to let people create a business and support their family while encouraging the local economy.

Problems with the microlending mystem

Although microlending is a useful tool for those who need small quantities of funds, there are many inherent problems in the current system. One of the biggest is the previously mentioned issue of lenders taking advantage of those in search of a loan. In many cases, the fees are high, bringing more profit for the lenders than the potential profits the loan taker would get if they were to invest in a business. Unscrupulous lenders will create a complex scheme that is hard to understand, taking advantage of the fact that many who apply for microloans are uneducated and poor. Some feel that the lack of transparency is the most critical issue related to micro-financing since lenders and those who receive the loans cannot easily interact.2

Additionally, most of the microloans given end up going toward necessities as opposed to the ideal of putting the money into a small business that could lead to new income and potential profits. Even those who do use the money to start businesses frequently discover that they still do not have enough capital to succeed.

Other problems include the large operating and overhead costs that those who want to begin microlending must face, the high fees that micro-lenders must charge to compensate for those overhead costs, the vast potential for corruption, the fact that the centralized structure moves incredibly slowly, and the slow resolution of transactions.

Multiple startups have realized that the blockchain is able to resolve the majority of these issues, giving it the potential to bring microlending back to its true purpose.

How the blockchain can be used for microlending

Although all blockchain projects designed for microlending have slightly different strategies, one of the common themes among them tends to be peer-to-peer lending. In this way, the blockchain platform in question acts as a marketplace that connects those who want to increase their income via the small interest rates on microlending with those who need a microloan. Other blockchain projects, such as Everex, instead offer microlending directly from the platform. In the case of Everex, the loans are determined by sales and other data.

Blockchain minimizes the risk of corruption

One of the biggest factors that contribute to the potential for corruption is the centralization behind most current microlending systems. Therefore, the simple fact that the blockchain is decentralized automatically reduces the potential for corruption. For corruption to occur, someone would have to change the information on every single instance of the blockchain. However, this would require too much effort and cost (via power expenditure) to be effective.

Blockchain speeds up transaction verification

Another key benefit of blockchain technology for microlending comes from the speed of transactions. The only requirement for blockchain verification is that the other members of the network sign off on the transaction. Because of the blockchain protocol, a transaction can be verified in just seconds or minutes. This is a sharp contrast to traditional banks, which typically require days and sometimes weeks to verify transactions.

Blockchain microlending solutions can help the unbanked

With the use of the blockchain, it also becomes increasingly feasible to help those without access to banks. Ashish Gadnis, CEO of BanQu, came across real-world examples that even those who received traditional microloans were not able to move on from the high interest rates later. Gadnis brought up the example of a farmer in East Africa she met who had received and paid off many microloans despite owning land and making money from the most recent harvest. Instead, the microloans seemed to trap this farmer in a cycle of debt repayment with interest rates of 15 to 40 percent.

When the blockchain comes into play, however, problems like this can be overcome. The farmer in question would be able to use a microlending blockchain-based service to get loans of various sizes with minimal interest rates, particularly after having proven himself to be successful.

Blockchain can eliminate the intermediary from microlending

One of the most useful features of the blockchain for microlending is the ability to eliminate the intermediary. This is partly why many microlending blockchain platforms are of a peer-to-peer nature. Without a middleman in place, people can directly connect with each other, cutting both the cost and the time spent. This can overcome such issues as local credit cooperatives being unable to help those in rural areas due to the prohibitive cost of providing access.

Blockchain can improve identity for microlending

Another key issue with microlending is the problem of identity, but the blockchain provides a solution for this, as well. For example, those who are unbanked have no credit profile or financial history, making them less likely to be approved by lenders, even micro-lenders. However, the blockchain can be used to create a digital identity that includes a credit history and profile, proving that the risk of lending to a certain individual is minimal. This will help not only those in areas with limited access to banking and lending but also those in developed countries who have poor credit scores, letting them build up their reputation in another way.

A look at some blockchain microlending platforms

There are already numerous blockchain projects involving microlending, with varying levels of popularity and slightly different models. BanQu, for example, focuses on letting users create an economic identity, which enables microlending. Moeda is a peer-to-peer lending and remittance platform that began using the blockchain to help make it easier for local credit cooperatives to connect with those in rural areas.

Uulala focuses specifically on microlending and microcredit.3 This platform focuses on helping the unbanked, with a specific focus on the large number of underbanked and unbanked Latinos. Like the other platforms, Uulala builds up a credit profile for users, who can then use their creditworthiness to find microcredit offerings from organizations within the platform. There are also numerous other blockchain projects for microlending, including those still in development.


1) Problems with Microlending and How Blockchain Solves Them.

2) Microlending Startups Look to Blockchain for Loans.

3) The Power of Blockchain for Microfinance.